Liability of executive directors of Czech corporations

The new Business Corporations Act brings many changes to the Czech company law, in particular with respect to liability of executive director (in Czech “jednatel”) of a Czech limited liability company (in Czech “společnost s ručením omezeným”) in case the company becomes bankrupt.

Under Section 62 of the New Business Corporations Act, an executive director as a member of company’s statutory body is obliged to surrender remuneration he/she received from the company provided that the following conditions are met:

• a company is declared bankrupt by the respective court;• an insolvency proceeding was initiated by a company’s creditor,• an insolvency trustee requested that the executive director surrenders benefits he/she received;

• the executive director knew or ought to know that the company is in the impending bankruptcy in the sense of Czech Insolvency Act but did not make all the necessary and reasonably predictable steps in order to avoid bankruptcy of the company in accordance with his/her duty of care.

If the above-mentioned conditions are met, the insolvency trustee can demand that the executive director surrenders remuneration which he/she received based on the agreement on performance of function of the company’s executive director as well as other remuneration, such as salary, if the executive director concluded an employment contract with the company, and non-cash benefits.

This statutory liability is applicable to both, current executive directors and former executive directors. The insolvency trustee can demand surrendering of remuneration up to 2 years as of the issuance of the final decision on the bankruptcy of the company.

Furthermore, the new Business Corporations Act in Section 68 also introduced a liability of executive directors for debts of the company. On the basis of the insolvency trustee’s or creditor’s petition, a court may order that a current or former executive director guarantees payment of the company’s debts by his/her own property provided that the following conditions are met:

• a company is declared bankrupt by the respective court;• the executive director knew or ought to know that the company is in the impending bankruptcy in the sense of Czech Insolvency Act but did not make all the necessary and reasonably predictable steps in order to avoid bankruptcy of the company in accordance with his/her duty of care.

If the above-mentioned conditions are met, the insolvency trustee or the company’s creditor may demand that the current or former executive director of a company pays company’s debts, irrespective whether he/she received any remuneration for the performance of the function of the member of the statutory body or not.

The advantage of this provision is that the action against an executive director may be filed even by a company’s creditor who did not submit its claim against the company to the insolvency proceeding.

Despite the fact that there is no limit in relation to statutory guarantee, we are of the view that the creditor can demand that the executive director pays only its receivables but not receivables of other company’s creditors.

On the other hand, the law explicitly excludes liability of executive directors who were appointed in order to avert bankruptcy or inauspicious economic situation of the corporation and who acted with due care.

In general, both, statutory liability under Section 62 and statutory guarantee under Section 68, apply to other members of statutory bodies of Czech corporations, in particular to members of Board of Directors (in Czech “členové představenstva”) or statutory director (in Czech “statutární ředitel”) of a joint stock company (in Czech “akciová společnost”).

To summarize, the new Business Corporations Act lifts the corporate veil of Czech companies by introducing the statutory liability and statutory guarantee of executive directors in case the company is declared bankrupt and the respective member of statutory body breached his/her duty of care.

Under Section 98(2) of the Czech Insolvency Act (Act No. 182/2006 Coll.), members of company’s statutory body are, generally speaking, obliged to file an insolvency petition against the company without undue delay after they learned or ought to learn about the bankruptcy of the company.

Therefore, we recommend that members of statutory body of Czech corporations conclude liability insurance policy and monitor, on a regular basis, financial situation of the company in order to check whether there is a risk that the company might become insolvent and their potential liability might arise.

rutland ježek, advokátní kancelář

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